IoM proposes new closed ended investment scheme regulation

The Isle of Man Financial Services Authority said it plans to go ahead with proposed changes to the regulations governing the way closed ended investment companies are to be run on the island, in the wake of a consultation that closed in May.

In publishing a summary of responses to the consultation paper yesterday, the regulator said the package of regulatory changes would now “be progressed, with some minor changes to terminology to improve clarity”, as responses to the proposed changes had been largely “positive or neutral”.

The main changes under consideration included a widening of the definition of collective investment schemes to include a limited number of closed-ended investment companies, or CEICs,  and a new exemption for managers, asset managers or investment advisers to certain types of specialist funds that would otherwise be regulated under the Isle of Man Financial Services Act 2008.

Andrew Harding, a partner with the Isle of Man arm of the Appleby law firm, as well as chairman of the Isle of Man Wealth & Fund Services Association, said closed-ended investment companies have been a “well used” element of the Isle of Man’s financial services repertoire for many years.

What the proposed changes to the existing regulations have been designed to do, he explained, is to bring certain categories of closed-ended investment companies “within the definition of a collective investment scheme, meaning that they will be subject to the oversight of the Isle of Man Financial Services Authority,” and would also have to “fall within certain permitted categories of international schemes”.

“The extended definition is not intended to capture listed companies, companies which have restricted numbers of participants and do not offer their securities to the public (or any section of the public), or companies that impose a minimum investment threshold per investor in excess of US$100,000,” he added.

“There are also ‘grandfathering’ provisions in relation to existing companies that are not looking to raise further capital from investors.

“Notwithstanding the foregoing, an open-ended investment company that would not otherwise be caught – for example, a listed fund – may be able to opt-in to the funds regime, which could have structuring advantages.”

As for the proposal to exempt some asset managers from regulation under the Financial Services Act 2008, Harding says this would provide a welcome, and fair, opportunity for new managers outside of what is a “substantive regime” that imposes “internationally accepted standards of regulation and supervision” on all asset managers incorporated in the Isle of Man, and operating there under an Isle of Man Financial Services Authority financial services licence.

“As you would expect, this [regime] can be onerous, and the IoM FSA have accepted that it is not proportionate in certain circumstances,” he said.

“Currently, in order to be licensed, the applicant company would need to have its own staff and offices in the Isle of Man, and would need to submit a business plan [that included] full details of all its directors, controllers and key persons.

“If the application were to be successful, the applicant would be subject to ongoing capital and solvency requirements and would need to comply with the Act and the Financial Services Rulebook.

“The new regime provides for an exemption that will allow for the establishment of exempt managers, investment advisers and asset managers of specialist funds established in accordance with the Collective Investment Schemes (Specialist Fund) Regulations 2010.

“This class of international collective investment scheme requires each investor to invest a minimum initial amount of US$100,000, and they must be able to certify that they are ‘specialist investors’ for the purposes of the regulations.

“Specialist funds are not subject to any restrictions as to the class of assets which may be held or as to the investment strategies that may be utilised.

“The exempt manager, investment adviser or asset manager may not provide services to any other class of fund, and will require the support of a locally licensed Isle of Man administrator that will provide administration services to the specialist fund and the exempt person.

“The Isle of Man administrator will need to be satisfied as to the exempt person’s systems and controls, and a director provided by the administrator will need to join the board of the exempt person.

“Overall, the proposed changes to the funds regime should provide a great deal of flexibility for start-up and emerging managers, family offices and multi-family offices looking to establish both open-ended and closed-ended corporate structures.”

To read and download the 67-page Summary of Responses to the Consultation Paper on Collective Investment Schemes – Closed-Ended Investment Companies and Other Mattersclick here. 

This article was first published on InvestmentEurope’s sister publication International Investment

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